WAE 6 - Tax planning Flashcards
What is the Ramsay Principle in tax law?
It applies taxation based on the substance of a transaction rather than its legal form, preventing artificial tax avoidance schemes.
When are loans not deductible for IHT purposes?
- Loans for BPR/APR/Woodlands Relief assets – Deduction is applied to the relievable asset rather than the chargeable estate.
- Loans not repaid from the estate – Only deductible if actually repaid.
- Loans used to acquire excluded property.
- Loans funding foreign currency accounts.
When does GROB apply to a gift?
- The donor still benefits from the asset.
- The donee does not take full possession before the 7-year period.
- The donor continues to use the asset (e.g., living in a gifted house rent-free).
What happens if a GROB still exists at death?
The asset remains part of the donor’s estate for IHT.
What is the POAC?
An annual income tax charge for individuals who:
* Have given away land, chattels, or certain trust interests.
* Still retain benefit from the asset (e.g., living in gifted property).
When does POAC not apply?
- The property remains part of the estate for IHT purposes (GROB applies).
- Transfers between spouses/civil partners.
- Maintenance gifts for dependents.
- Sales at arm’s length.
What does GAAR target?
Tax arrangements that are:
* Designed to create a tax advantage.
* Abusive under the double reasonableness test.
* Contrary to the purpose of tax law.
What are the consequences of GAAR?
- HMRC can counteract the tax advantage.
- 60% penalty on the counteracted amount.
- GAAR Advisory Panel reviews HMRC’s application.
Who must report tax avoidance schemes to HMRC?
Promoters (e.g., tax advisers) must disclose notifiable arrangements with a scheme reference number (SRN).
What are key IHT hallmarks for DOTAS?
- Reducing IHT on trusts/gifts to close companies.
- Avoiding GROB charges.
- Creating IHT reductions without a chargeable transfer.
How should BPR/APR assets be gifted for tax efficiency?
- Do not gift to an exempt beneficiary (e.g., spouse/charity), as this wastes relief.
- Consider gifting to a discretionary trust, where relief applies, but the assets remain outside the spouse’s taxable estate.
Who are exempt beneficiaries for IHT?
- Spouse/Civil Partner – 100% exemption.
- Charities – Fully exempt.
What is the impact of specific gifts vs. residuary gifts?
- Specific gift to an exempt beneficiary – No IHT applies; only the residue is taxable.
- Specific gift to a chargeable beneficiary “subject to tax” – IHT is deducted from the gift.
- Specific gift “free of tax” – Grossing-up applies, increasing IHT liability.
When does double grossing-up occur?
- When some but not all chargeable gifts are given “free of tax”.
- When the residue is left to an exempt beneficiary.
How can double grossing-up be avoided?
- Avoid gifting chargeable amounts “free of tax”.
- Clearly structure will provisions to prevent unnecessary IHT increases.
How can NRB planning benefit married couples?
- Leaving everything to the spouse ensures spouse exemption but does not use the NRB.
- Using the NRB at first death (e.g., discretionary trust) ensures both NRBs are fully used.
What is the risk of wasting NRB?
If the first spouse’s estate is below NRB, any unused NRB may be lost unless claimed by the surviving spouse.
Why is NRB planning crucial for unmarried couples?
- No spouse exemption, so IHT applies on both deaths.
- Risk of “bunching” IHT (assets taxed twice if left entirely to surviving partner).
What is the solution for NRB planning in unmarried couples?
Use a discretionary trust at first death to reduce the survivor’s estate.
What conditions must be met to claim RNRB?
- A “qualifying residential interest” (QRI) must be inherited by direct descendants.
How can RNRB be lost?
- If residue is split between chargeable and non-chargeable beneficiaries.
- If the property is left in a discretionary trust.
What are the key advantages of a discretionary trust in a will?
- Keeps assets out of a beneficiary’s taxable estate.
- Protects assets from creditors/divorce claims.
- Can manage IHT liability over multiple generations.
Why does a discretionary trust not qualify for RNRB?
RNRB only applies if descendants inherit outright.
What is a 2-Year Discretionary Trust in a will?
A temporary trust that allows flexibility in asset distribution.
How does a 2-Year Discretionary Trust benefit IHT planning?
- If assets are distributed within 2 years, the trust is treated as if it never existed for IHT.
- If assets pass to exempt beneficiaries, a refund of IHT can be claimed.
What is a Life Interest Trust?
A life tenant receives income, while capital is preserved for remaindermen.
How does a Life Interest Trust impact IHT?
- If the spouse is the life tenant, spouse exemption applies.
- If a non-spouse is the life tenant, IHT applies at death.
